This is one of the genuinely effective special remedies in Indian commercial law, and it is heavily under-used.
The statutory scheme
Under the Micro, Small and Medium Enterprises Development Act, 2006:
- Section 15: a buyer must pay a micro or small supplier on the agreed date, and where there is no agreement, within 15 days. In no case may the agreed period exceed 45 days from acceptance or deemed acceptance.
- Section 16: on default, the buyer is liable to pay compound interest, compounded monthly, at three times the bank rate notified by the Reserve Bank of India. This is not discretionary and it accrues automatically.
- Section 18: the supplier may refer the dispute to the Micro and Small Enterprises Facilitation Council, which first attempts conciliation and then, if that fails, conducts or refers the matter to arbitration, treating it as an arbitration under the Arbitration and Conciliation Act, 1996.
How to use it
- Confirm you hold a valid Udyam registration as a micro or small enterprise. Note that the special payment protection covers micro and small suppliers; a medium enterprise supplier does not get the same benefit.
- File the reference online on the MSME Samadhaan portal with the invoices, purchase orders, proof of delivery or acceptance, and the interest computation.
- Attend conciliation. A large share of these settle at this stage, because the interest liability is unattractive and the buyer's auditors must disclose MSME dues.
- If conciliation fails, the matter proceeds to arbitration and results in an award.
Two pressure points. First, Section 23 disallows the interest as a deduction for income tax purposes, so it is a genuinely expensive liability. Second, companies must disclose amounts outstanding to MSME suppliers in their financial statements and file periodic returns on MSME dues. Being named as a defaulter is a real commercial cost.
The tax provision that changed the conversation
There is now a third and sharper pressure point. The income-tax disallowance for delayed payment to a micro or small enterprise, introduced by the Finance Act 2023 as Section 43B(h) of the since-repealed Income-tax Act, 1961 and carried forward into the Income-tax Act, 2025, which replaced it with effect from 1 April 2026. Confirm the current section number before relying on it in correspondence. The provision and applicable from assessment year 2024-25, disallows a deduction for any sum payable to a micro or small enterprise beyond the time limit in Section 15 of the MSMED Act. What makes it bite is that clause (h) is carved out of the usual proviso to Section 43B. For every other clause, paying before the return due date preserves the deduction. For micro and small suppliers it does not: if payment is late under Section 15, the deduction moves to the year of actual payment. A buyer who sits on your invoice therefore pays tax on money he has not kept.
The disclosure obligation is specific too. Section 22 requires a buyer whose accounts are audited to state the principal and interest due separately, the interest paid, and the interest accrued and unpaid. Specified companies also file a half-yearly return in MSME Form 1, now confined to companies with payments pending beyond forty-five days. Your unpaid invoice is something both his auditors and his Registrar filing must acknowledge.
The conditions that decide whether the reference survives
Three points decide whether a reference works, and all three are settled before the dispute arises.
- Which enterprise you are. Sections 15 and 16 protect a micro or small supplier. A medium enterprise gets no payment protection, however large the debt.
- When you registered. The benefit attaches to your status as a supplier, so registration post-dating the supply contract is the point most often taken against a claimant. Register when you start trading, not when you start litigating.
- What acceptance means. The clock runs from acceptance or deemed acceptance, and goods are deemed accepted unless the buyer objects in writing within fifteen days of delivery. An oral complaint months later does not reset it, which is why a signed delivery challan matters.
Where the reference goes, and how fast
Section 18(4) is what makes this remedy unusually useful. The Council has jurisdiction where the supplier is located within its territory and the buyer is located anywhere in India. So a Bengaluru supplier refers the dispute to the Karnataka Council and the buyer must come to it, reversing the ordinary position that the creditor chases the debtor. Section 18(5) requires every reference to be decided within ninety days. That is not always kept, but it is a standard you can press.
Section 24 gives Sections 15 to 23 effect notwithstanding anything inconsistent in any other law, and this has been read as allowing a Council reference to proceed even where the contract has its own arbitration clause. A buyer's standard-form clause naming a distant seat does not by itself keep you out.
The condition on appeal
An application to set aside an award made under this scheme requires the appellant to deposit 75 percent of the amount awarded, which strongly discourages appeals filed only to delay.
Two refinements. The deposit condition applies to an appellant who is not the supplier, so it burdens the buyer, not you. And the court may direct that a reasonable part of the deposit be released to you while the challenge is pending. Ask for it; that release is routinely overlooked and it turns a paper award into money in hand.
If you are not MSME-registered, the ordinary routes remain: a legal notice, a summary suit under Order 37 CPC on the invoices, or arbitration if your contract provides for it. Our note on the money recovery suit compares those routes on cost and speed. Where you are registered, our guide to MSME delayed payment recovery sets out the papers to file with the reference and how the interest is computed.